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Tying, Foreclosure, and Exclusion

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  • Michael D. Whinston

Abstract

Tied sales have a long history of scrutiny under the antitrust laws of the United States. The primary basis for the condemnation of this practice has been the court's belief in what has come to be known as the "leverage theory" of tying: that is, that tying provides a mechanism whereby a firm with monopoly power in one market can use the leverage provided by this power to foreclose sales in, and thereby monopolize, a second market. In recent years, however, the leverage theory has come under heavy attack. In this paper, I reconsider the leverage hypothesis. I argue that, in an important sense, the models used by the critics of the leverage theory which all assume that the tied good market has a competitive, constant returns-to-scale structure- are incapable of addressing the central concern of the leverage theory, that tying can be profitably used to change the market structure of the tied good market. I then demonstrate that when the tied good market has an oligopolistic structure, tying can indeed serve as a mechanism for leveraging market power through the foreclosure of tied market rivals sales. The mechanism through which this foreclosure occurs, its profitability for the monopolist, and its welfare implications are discussed in detail.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2995.

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Date of creation: Jun 1989
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Publication status: published as American Economic Review, Vol. 80, No. 4, pp. 837-859, September 1990.
Handle: RePEc:nbr:nberwo:2995

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  1. Ordover, Janusz A. & Saloner, Garth, 1987. "Predation, Monopolization and Antitrust," Working Papers, C.V. Starr Center for Applied Economics, New York University 87-07, C.V. Starr Center for Applied Economics, New York University.
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  6. Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 38(3), pages 283-98, March.
  7. Jeremy I. Bulow & John Geanakoplos & Paul D. Klemperer, 1983. "Multimarket Oligopoly," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 674, Cowles Foundation for Research in Economics, Yale University.
  8. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  9. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, American Economic Association, vol. 74(2), pages 361-66, May.
  10. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  11. McAfee, R Preston & McMillan, John & Whinston, Michael D, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 371-83, May.
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